11/13/2013

Latent Defects, Wet Cores, Big Trouble

By J. Dirk Schwenk, Baylaw, LLC

The worst transactions I see are the ones where the sale goes smoothly, but it turns out that there was a major hidden problem with the boat.  Usually this means water intrusion in the hull or stringers.  If it’s an expensive fix, the buyer is going to be looking for someone who knew or should have known and everyone else is going to be running for the hills.  If someone is injured or dies, it will get ugly.  This article is intended to help keep brokers out of this jam, or if the problem has already started, to offer some suggestions for getting out.

1. Make sure your insurance is in order.  If something terrible happens, it is the lawyer’s fees that will hit first, and the liability policy will cover that defense.  In many cases, the defense will be all that is necessary if the purchase/sale contract is well written.  There is no point in going bankrupt to successfully defend a weak claim, so make sure that you are properly covered.
2. Assign responsibility to the hull policy (or policies).  Most marine insurance covers all losses unless there is a specific exclusion.  This means that it is the insurer’s obligation to prove the cause of a loss and to prove that the cause falls into an exclusion.  I regularly see major insurance companies denying coverage for wet or failed core based on latent or manufacturer’s defects exclusions.  Upon close analysis, the exclusions are not supported by the language of the policy. One major policy excludes “manufacturer’s defects” but covers “latent defects” which exist at the time of manufacturing.  The courts that have looked at this agree that this creates an ambiguity, and requires coverage for problems with core and lay up.  Coverage is also possible if the cause is unknown, because the insurer has to prove the cause of the loss. Takeaway -- don’t give up on hull insurance just because it has initially declined to cover -- you can save yourself and your customers a great deal of money this way.
3. Disclose, and be sure there is, a survey.  Most latent defect cases arise because a boat is wet -- either the hull is and stringers are saturated or there is a mold problem.  Mold problems and core problems, if known, should be disclosed.  A survey provides a great deal of protection -- especially for sellers -- in the event that later problems are revealed.  They also provide protection for brokers because the act of inspecting largely releases liability for statements about the boat.  A seller that inspects is pretty much stuck with what they get, from a legal perspective.  Personally, if I were representing a prospective purchaser, I would carry a moisture meter and a sounding hammer and I would keep my customers away from wet boats.
4. Contracts.  If you are a YBAA member using a YBAA contract, you are well insulated from liability for hidden problems.  If you are reading this and you are not using that contract, then you should be sure that a good lawyer has looked at what you are using.
5. Be nice.  If something really goes wrong, do not be afraid to say “I’m terribly sorry this happened.” One of my clients, some years ago, had a situation in which a child died in a terrible accident.  There is an immediate urge to circle the wagons and lawyer up, but that can be a mistake. Honor the situation in a human way - it’s the right thing to do, and it may actually help avoid litigation in the future.  If there are skeletons in the closet, a plan should be made for that too, but it should not be at the expense of being nice.

Mr. Schwenk is a member of the Maryland Bar and bar of the Federal Court for the District of Maryland.  He is a Certified Marine Investigator through the International Association of Marine Investigators, a member of the Mid-Atlantic Mariners Club, Marine Trades Association of Maryland and the Severn Sailing Association, where he sails J-24s and Jet-14s with his wife Stefanie. He is a past President of the Jet 14 Class Association, and the 6 time Chesapeake High Point champion in that class. In his remaining free time he is the father of two sons, plays basketball and writes and records acoustic music.